Demand for passenger vehicles, which has been on a downhill so far this year, will continue to remain sluggish through the first half of 2014 due to high interest rates which has weakened consumer sentiment, says a Fitch Ratings report.

Passenger vehicle sales fell 7.1 per cent year-on-year during the January-October period, largely driven by a massive 10.5 per cent drop in car sales. Although utility vehicle sales rose 7.6 per cent during this 10-month period, that was on the back of strong sales in the parts of the year, the report said.

Even demand for diesel-powered utility vehicles declined in the past six months as the differential between petrol and diesel prices narrowed, excise duties in most segments increased, and high interest rates choked consumer borrowing, the report noted and said utility vehicle sales have fallen in spite of launches of popular new models in the last 12-15 months.

The tepid demand has been evident in the recent festive season, which has so far bucked the trend of increased sales seen in previous years.

The passenger car segment continues to face challenges from the high cost of ownership and slowing economy, which has resulted in poor consumer sentiment, especially in urban markets. This is reflected in the flat sales registered by the top two car companies-- Maruti Suzuki and Hyundai Indiawhich account for nearly 70 per cent of the market in the recent festive season.

"We expect the present challenging environment to continue to hurt sales in the near-term, while rising competition and heavy discounting may erode manufacturers' profitability," the report said.

Sales of commercial vehicles shrank 13.5 per cent in the first 10 months, while the medium and heavy commercial vehicles segment saw a steeper fall of 28.7 per cent and light commercial vehicle sales declined 3.9 per cent.

However, Fitch expects demand for LCVs to remain weak through the H1 of 2014 and improve marginally in H2, significantly eroding the earnings and profitability of manufacturers.

One of the worst to be hit will be the market leader Tata Motors, the report said, adding that the strong performance by its British subsidiary Jaguar Land Rover will mitigate the impact.

On the two-wheeler segment, the report says this segment will be the only market to show marginal demand growth in the near-term.

Driven by improving rural demand and stronger demand for scooters from urban markets, two-wheeler sales rose 18 per cent in September and October. The exceptionally good monsoons will only add to the demand from rural markets, the report added.